With SOCPA’s deadline of 2017 looming, companies are starting to realise the implications of adopting the requirements of International Financial Reporting Standards (IFRS). Many are actually finding the effects to be broad-ranging and significant in practice whilst others indicate that they think it will have less of an impact.
Broad-ranging impact
The impact of IFRS on the structure of the balance sheet and reported results have a direct impact on credit ratings, analysts assessments, borrowing costs and dividend payment policies. All of these affect the performance of shares on the exchange. It is considered that the application of IFRS has a more far-reaching reaching impact than just affecting the accounting entries, which requires careful management of stakeholders. IFRS affects financial results and changes the shape of the balance sheet. It can affect key performance indicators against which the management are assessed and can change liquidity ratios, impacting the cost of debt for entities. Anticipating these changes in advance of the adoption date allows entities to manage the impact of IFRS and potentially make changes in advance to negate any detrimental effects.
Valuation opportunities
Omar Al Sagga, Deputy Country Leader, PwC Saudi Arabia, confirms that IFRS poses a significant challenge to companies but adoption and transition rules also present significant opportunities. “The adoption of IFRS in Saudi Arabia is presenting listed entities with an opportunity to give a more accurate value to property and other assets from the adoption date,” he says. “Previously, under SOCPA, companies had to recognise such assets at their historic cost. The adoption of IFRS allows entities to demonstrate a more current financial position and potentially create distributable reserves that otherwise would not exist.” PwC is seeing entities engage with its valuation experts as a result. Companies are taking advantage of the adoption rules to create additional value in the balance sheet that was not previously recognised.
Streamlining and saving costs
In addition to valuation opportunities, streamlined processes and reporting can also be introduced, saving costs and improving the accuracy and speed of the financial reporting processes, giving management better information for decision-making purposes. Al Sagga indicates that entities are seeing that the adoption of IFRS enables complex groups to standardise both policies and procedures across operations, including those of internationally located subsidiaries where IFRS is often an allowed reporting framework. IFRS is being seen as a conduit for not only improving the quality of financial reporting but also as a tool for saving costs and improving performance.
Challenges
However, it’s not all roses in the garden. IFRS is also placing a heavy burden on entities in terms of the required amendments to systems and processes. Al Sagga indicates that organisations are finding themselves having to re-engineer reporting systems to capture and report the data required by IFRS for disclosure purposes. IFRS also contains distinct rules on what costs can be recognised in the balance sheet when constructing assets or raising finance and which have to be expensed. IFRS requires that general overheads should be expensed and only certain direct costs of raising finance can be carried forward in the balance sheet. Entities are finding that not only do allocation processes need to be changed – which can be both costly and time consuming – but also IFRS is forcing costs to be recognised in the income statement, placing downward pressure on reported results in some situations.
Gavin Steel, Partner and Head of Coversion Services, PwC Middle East indicates that “a well-timed and thoroughly executed conversion programme that addresses the broader issues of adopting IFRS is essential; it can help a company identify the issues and mitigating solutions in advance, ensuring management can focus on what they do best – running the business. As companies get closer to the official adoption date of 1st January 2016, further attention is expected on the implications of IFRS across reported results, systems, people and stakeholders. It is becoming a key focus of the finance community in Saudi Arabia. The changes to reported results might affect Zakat tax and we expect that a number of companies will need to engage directly with the authorities and their advisers to understand the implications on amounts due, and how they will be recorded and disclosed in financial statements”.
Steel also indicates that some companies may take relief from the fact that the changes to revenue recognition are being delayed to 2018. However, companies that strictly follow the applicable standards as issued by the regulators will then have to implement changes in 2017 and immediately amend policies in 2018 when the requirements of both IFRS 15 and IFRS 9 are applicable. Steel feels that companies will need to consider these standards carefully to assess whether they may want to adopt these standards earlier as they may bring improved financial reporting whilst also avoiding a second wave of change in 2018. Adopting these new standards in 2017 may save effort in the longer term, but their implementation can be a significant exercise as they often affect systems and processes. Consequently, Consequently, fully complying to the requirements of these standards in 2017 may actually be a challenge, and the strategy adopted by companies will result in a balancing act between the available time to implement and the effort required to do so.
Companies will be reporting their first IFRS-compliant balance sheet as of 31st December this year. It is yet to be seen what the expected results of the transition to IFRS will be, but PwC indicated that they believe the outcome of the adoption will be surprising for a lot of entities.
